Chapter 11. Tools for Restructuring the Economy: Support for Fiscal Restructuring

Taxes and subsidies designed specifically to reach environmental goals are not yet widespread. As noted earlier, there has been some tax shifting in Europe, but it is still in the early stages, not exceeding more than 3 percent of the official revenue of any country. Governments have used environmental taxes to reduce the discharge of heavy metals into the environment in the Netherlands or the use of leaded gasoline in countries such as Malaysia, Thailand, and Turkey. But they have not yet been used effectively on big-ticket items. For example, no government has seriously discussed adopting a carbon tax that would phase out fossil fuel use.

As mentioned, in both Europe and North America polls show that 70 percent of voters on both sides of the Atlantic think it is a good idea. The challenge is to translate this approval into support. There has been little political leadership on the issue, especially from the United States, the country the world looks to for leadership on major issues. The focus in the United States is almost exclusively on whether taxes are being raised or lowered, not on restructuring the system.46

With subsidies, there is little public knowledge of the scale of subsidies. Many are hidden, some carefully disguised to reduce their public visibility. As the Earth Council report concluded, many governments of industrial countries have no way of knowing how much they subsidize fossil fuel use with various direct and indirect subsidies. For example, the U.S. oil depletion allowance, though it is not highly visible or regularly debated in Congress, is a powerful subsidy for oil use.47

David Roodman notes in The Natural Wealth of Nations that there is little organized support within the environmental community for tax shifting. Among the major environmental membership organizations in the United States, not one has a full-time staff person working on these issues. There are now two small U.S. groups working on fiscal shifting. The first is Taxpayers for Common Sense, a group established in 1995 that has 1,000 members. The second is Green Scissors, a group that works specifically to eliminate environmentally destructive subsidies from the federal government's annual budget.48

Among economists, there is strong support for tax restructuring. This was evident in 1997 when some 2,500 leading economists worldwide, including eight Nobel laureates, endorsed the idea of a carbon tax. The actions of this group made it clear that it is not the wisdom of restructuring our fiscal system that is the question, but whether we can overcome political inertia and the obstacles posed by the interests vested in the status quo.49

MIT economist Paul Krugman writes in the New York Times about the distortions in our economy that result from the failure of the market to reflect the full costs of many products and services. He observes, "you don't have to be an elitist to think that the nation has lately been making some bad choices about energy use, and about lifestyles more generally. Why? Because the choices we make don't reflect the true costs of our actions." Starting with the estimated annual $2.6 billion cost of traffic congestion in Atlanta in 1999, Krugman calculates that the decision by one person to commute by car in Atlanta now imposes on others an additional congestion cost of $3,500 per year—or $14 per workday. This is each driver's part of the indirect or social costs per person of traffic congestion in Atlanta. As Krugman and other prominent economists focus on these issues, it will help to raise public understanding of the need to incorporate indirect costs in the market prices that shape our decisions.50

Some key organizations are beginning to support the idea. A report on the environmental outlook in the 30 members of the Organisation for Economic Co-operation and Development (OECD) recommended a broad-based tax restructuring to deal with environmental threats. Since the OECD represents nearly all the leading industrial countries, its recommendations are certain to garner public attention.51

During 2001, The Economist—raditionally not a leader on environmental issues—has become an outspoken advocate of fiscal restructuring. The editors recommend that governments not attempt to pick "the winners" among new energy technologies but instead "they would do better to provide a level playing field by scrapping the huge and usually hidden subsidies for fossil fuels, and by introducing measures such as carbon taxes so that the price of fossil fuels reflects the costs they impose on the environment and human health."52

The potential benefits of fiscal restructuring are obvious. Fiscal policy, including the shifting of both taxes and subsidies, is the key to our success in building an eco-economy because it is systemic. Reducing mining subsidies not only makes metals produced from virgin ore more costly, for example, but it also indirectly encourages the recycling of metals. Similarly, raising the price of gasoline with a carbon tax that reflects the full cost to society of burning this fuel will permeate the entire economy, sending signals through the market that will lead to more environmentally responsible behavior.

ENDNOTES:46. Polls from Roodman, op. cit. note 6, p. 243.

47. De Moor and Calamai, op. cit. note 11, p. 32.

48. Ibid., p. 243; information on both Taxpayers for Common Sense (TCS) and Green Scissors at Taxpayers for Common Sense, www.taxpayer.net, viewed 25 July 2001; membership numbers from TCS, discussion with Shane Ratterman, Earth Policy Institute, 25 July 2001.